Obama Seeks to Close Loophole That Firms Use to Shield Profits Abroad

Video President Obama called for an end to a loophole that allows United States corporations that move headquarters overseas to enjoy tax breaks.

By MICHAEL D. SHEAR and DAVID GELLES

July 24, 2014

LOS ANGELES — President Obama on Thursday called for Congress to strip away tax advantages that have encouraged a rush of mergers and acquisitions that give companies an overseas base while they maintain their presence in the United States.

In an appearance at a technical college that was intended to focus on job training, the president used unusually harsh language to describe American companies that acquire overseas companies to relocate for tax reasons, known as inversions. He said they were renouncing their American citizenship by “cherry-picking” the nation’s tax laws at the expense of ordinary taxpayers.

“These companies are cherry-picking the rules, and it damages the country’s finances,” Mr. Obama said. “It adds to the deficit. It sticks you with the tab to make up for what they are stashing offshore.”

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“I don’t care if it’s legal — it’s wrong,” he said, prompting the audience to boo the companies taking advantage of the practice.

Last week, the pharmaceutical giant AbbVie, based near Chicago, agreed to buy its European rival Shire for around $54 billion, allowing it to reincorporate in Britain. The move would lower its effective tax rate to 13 percent by 2016 from 22.6 percent in 2013, saving millions of dollars a year.

Walgreen, the drugstore chain, has said it is considering a buyout of the British chain Alliance Boots that would similarly relocate its tax headquarters.

Video President Obama, in an interview with Steve Liesman of CNBC, said that he was calling for Congress to strip away tax advantages that have encouraged a rush of overseas deals.

There is growing consensus on Capitol Hill that the rush of inversions should be stopped. Lawmakers from both parties worry that the more companies move their headquarters to countries like Ireland and the Netherlands, the more the American tax base is being compromised.

Democrats and Republicans seem to agree that a short-term fix is needed, but there is partisan disagreement about what anti-inversion legislation should look like.

On Thursday, the president called on members of Congress to take action on inversions even if they disagreed with his broader calls for changes to the tax system that would lower corporate rates — changes that Republicans have refused to consider.

“You shouldn’t get to call yourself an American company only when you want a handout from the American taxpayers,” he said.

The decision to focus on the tax loophole is part of a strategy to position the president on the side of what White House officials call a new economic patriotism. He is pressing that argument as the fall midterm elections approach.

Earlier Thursday, Mark J. Mazur, the Treasury Department’s assistant secretary for tax policy, made the case that any new laws targeting inversions should be backdated to May 2014, potentially affecting a number of multibillion-dollar deals.

Whether any legislation against inversions is retroactive has quickly emerged as a sticking point between Democrats, who favor retroactivity, and Republicans, who have concerns about backdating any new laws.

In a blog post, Mr. Mazur said that there was ample precedent for retroactive tax legislation, and signaled that the administration would push for it.

“Congress has frequently imposed retroactive effective dates for provisions that shut down egregious tax loopholes,” he wrote. “In these cases, backdated implementation is often important to ensure that companies do not take advantage of the lengthy legislative process to rush through transactions exploiting the loopholes they know they are about to lose.”

Retroactive tax legislation, he and others contend, is extremely rare and would effectively change the rules after companies have signed on to multibillion-dollar deals that are difficult and costly to unwind.

On Thursday, Mr. Mazur countered by pointing to several retroactive tax laws. The most recent bill to target inversions, the American Jobs Creation Act of 2004, contained an anti-inversion provision that was effective from March of the previous year.

The Taxpayer Relief Act of 1997 cracked down on a loophole that allowed some companies to avoid paying taxes when getting sold. That was backdated to May 1995.

And the Tax Relief Extension Act of 1999 contained several retroactive measures, including one targeting capital gains income generated using derivative contracts related to pass-through entities like partnerships.

“These kinds of tax provisions are hardly unusual and have been enacted as part of legislation across administrations — including an anti-inversion measure enacted by a Republican Congress in 2004,” Mr. Mazur wrote.

Investment bankers are advising their corporate clients that any anti-inversion legislation is unlikely to be passed this year, and that if it does get passed, it is unlikely to be retroactive.

But with Washington increasingly focused on the issue, more companies are likely to try to sign their deals sooner rather than later.

Michael D. Shear reported from Los Angeles, and David Gelles from New York.